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As South Korean President Lee Myung-bak and Japanese Prime Minister Yasuo Fukuda agreed to resume negotiations on a bilateral free trade agreement, which have been suspended for three years and five months, via a working-level discussion. However, the prospect for FTA negotiations is still in question.

South Korea and Japan took their first step toward FTA talks in November 1998 after the two nations’ trade ministers agreed to launch a joint study conducted with the participation of the government and the private sector. Between 2002 and 2003, the two sides held eight rounds of discussion with government officials, industry executives and professors. South Korea and Japan officially launched the first round of FTA talks in December 2003. The talks have been stalled since the sixth round in November 2004 because of differences in the scale of market opening for Japan’s farm and fisheries products.

This time, agreement on the resumption of FTA talks was mainly initiated by Japan. Since Seoul and Washington signed a free trade deal in June, Japanese business leaders have been concerned that their automobile, flat-panel display and mobile phone companies could lag behind their South Korean rivals in the U.S. market. The Japanese government has also had a strong desire to restart FTA talks with South Korea as part of its strategy of keeping China in check.

On the contrary, South Korea has had a cautious attitude toward the resumption of FTA talks with Japan, saying that Tokyo needs to change its position and open its agricultural market. South Korean trade officials have said that more thorough preparations were necessary in order for the talks to resume. In a press meeting last month, South Korean Trade Minister Kim Jong-hoon said, “With Japan, I think a significant amount of conditions are needed because of the (previous) stall in the talks.”

If the FTA talks resume, the main sticking point is likely to be the degree to which Japan is willing to open its agricultural market. South Korea sees that an FTA with Japan could benefit its farmers, who have been damaged by a series of free trade deals with other nations. However, Japan has been reluctant to open its agricultural market wider because its ruling Liberal Democratic Party’s support base is composed primarily of farmers. When the 2004 talks failed, Japan said it would open 56 percent of its agricultural market, while South Korea requested an opening of more than 90 percent.

However, South Korea is on the defensive in the manufacturing sector. In particular, if the FTA with Japan were to come into force, it would deal a serious blow to South Korean auto-parts makers. The state-run Korea Institute for Industrial Economics and Trade expects South Korea’s trade deficit with Japan to widen by US$6.4 billion a year if the tariff and non-tariff barriers for Japanese auto-parts makers are abolished.

Kim Yang-hee, a researcher at the Korea Institute for International Economic Policy, said, “There is a high possibility that the Korea-Japan FTA could significantly damage our small- and medium-sized companies and worsen polarization in the manufacturing sector, a structural problem for our economy. Also, it would undermine South Korea’s efforts to secure new growth engines.”

An official at South Korea’s Trade Ministry said, “Under the agreement made by the two leaders, the two sides could start a process of preparation to resume the talks. If the Japanese were to demonstrate that it was sincere about non-tariff barriers, technology cooperation and its government procurement market, it would help the two sides restart the talks,” the official said.

If South Korea and Japan were to sign a free trade pact, South Korea would be on course to agreements with three mega economies. South Korea and the United States signed a similar deal in June, and Seoul is currently engaged in free trade talks with the European Union. Analysts say that simultaneous free trade deals with these big economies will have a serious impact on the South Korean economy, so a cautious and close approach is needed.

Kim Yang-hee of the Korea Institute for International Economic Policy, said, “It’s problematic because the government is hastily pushing simultaneous FTAs forward without checking for side effects.”

Please direct questions or comments to [englishhani@hani.co.kr]